Government taken to task for failing to recognise Carillion's financial distress

The government has been rebuked by MPs from the Public Accounts Committee for its failure to recognise and act on Carillion’s financial distress earlier. 

The PAC is now calling into question the way government manages its relationships with strategic suppliers and the potential impact on the delivery of public services.

The government runs a “traffic light” system of warnings rating suppliers as red, amber or green (RAG) depending on their financial health.

Suppliers can also be designated a black ‘High Risk’ status but the committee attacked the system as “too slow and clunky”.

Committee deputy chair, Sir Geoffrey Clifton-Brown: “The government’s RAG scale for strategic suppliers appears to be too slow and clunky. Profit warnings for Carillion were issued in July and September 2017 and yet a high-risk recommendation to ministers was not made until 29 November 2017. The [markets], in contrast, knew well before July 2017 that Carillion was in trouble.

“Too many government facilities contracts were concentrated in one large firm giving the impression that it was too big to fail, hence the perception that the government would bail them out when push came to shove.

“The Carillion board’s erroneous belief that the government would not let the company collapse appears to have contributed to their failure to take the necessary action to save the company and prevent the sad loss of jobs and damage to numerous suppliers and subcontractors when Carillion went into liquidation.”

The Carillion assessments, which have been published by the committee, showed while Carillion had been rated amber owing to performance against contracts with the Ministry of Defence and Ministry of Justice, it was not until after Carillion issued a profit warning in July 2017 that government downgraded Carillion to red.

The MPs said it appeared “government was not aware of Carillion’s financial distress until this point”.

While officials recommended a provisional black rating for Carillion in November 2017, following representations from the company, the Cabinet Office did not confirm the designation. Carillion collapsed less than two months later.

PAC chair Meg Hillier: “The Carillion papers identify clear and compelling problems with the business in the months leading to its collapse. government had the opportunity to deal with them.

“When a contract breaks down, government is the provider of last resort. While it did not bail out Carillion – the company went in liquidation – it did inherit responsibilities and costs, ultimately borne by taxpayers, that would otherwise not be met. Failure of essential services is not an option so we need to understand the potential risks to the taxpayer.

“The fall-out from Carillion’s collapse and the resulting burden on the public purse is still not clear. We will be seeking clarity on these critical matters and probing suppliers and government about what they are doing to ensure such a catastrophic failure is not repeated.”

The committee said the risk assessments relating to other strategic suppliers raise concerns about their performance against contracts and about the relationship between strategic suppliers like Carillion and government.